For a three-digit number, your credit score packs a big wallop. A low score can thrust you into the financial abyss of the sub-prime market, costing you thousands of dollars in added interest over the life of a car loan or mortgage. Consumers who have a very low score --or no score at all-- may not get credit on any terms.

A quick glance at this single bit of information gives creditors all they feel they need to make judgments about whether you will repay a car loan, mortgage or credit card debt. Your score is a snapshot of your credit report, giving creditors instant clues about how you pay your bills, how you've handled credit over the years and even whether financial troubles have led you into the courts.

Born as a mortgage underwriting tool in the mid 1990s, credit scores are now commonly used by all lenders. Your credit report and/or your credit score may also be seen by employers, landlords, or cell phone and utility companies.

A credit score is cold-hearted. It says nothing about unexpected medical bills or loss of a job. Proponents of the credit scoring system claim the process is fair to everyone since neither race, sex, nor age are considered. (For more on the factors that make up your credit score, see Part 4 of this guide.)

Others are skeptical of the claimed nondiscriminatory effects of scoring. Consumer advocates worry, for example, that low-income workers, minorities, or segments of the population that do not have access to traditional credit sources like major credit cards or mortgages may score lower than others. Another major concern, documented in various studies, is the accuracy of data in the underlying credit report. (See the Resources section at the end of this guide for links to studies on accuracy in credit reporting and credit scoring.)

Consumer awareness of credit scoring has increased dramatically since the late 1990s. Federal law gives you the right to get some scores for a "reasonable" fee. (See Part 2.)

The purpose of this guide is to acquaint you with the basics of scoring, offer tips on how to improve your score, and give you additional resources for further information.

2. Your Rights to Credit Scores

Credit scores have been available for some time. Some states - California led the way -- passed laws to require score disclosures. Even without the legal requirement, scores soon became available as industry practice. The Fair Credit Reporting Act (15 USC §1681)(FCRA) created a national standard allowing access to credit scores for a "reasonable fee". However, the "reasonable fee" access only applies to "educational" credit scores compiled by the three national credit bureaus - Experian, TransUnion, and Equifax.

What is a credit score?

The FCRA defines a "credit score" as:

A numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default... (FCRA §609(f)(2))

In short, a credit score is a grading system that adds or subtracts points based on select data in your credit report. Late payments, maxed out credit cards, and bankruptcies are negative factors that take points away. A solid payment history and prudent use of available credit add points. Your final grade -- your credit score -- is said to measure how likely it is that you will repay a loan. (For more on the factors that go into calculating your credit score, see Part 4.)

Do I have a right to free credit scores?

Generally, no. You can get your score at a “reasonable” fee as determined by the FTC. According to the FTC, $8.00 is generally a "reasonable" fee for a credit score.

However, rules adopted by the Federal Reserve Board and the FTC give consumers the right, in some cases, to receive credit scores when applying for credit or a notice that credit has been approved but that the consumer did not receive the most favorable credit terms because of the credit score. Called “risk based pricing” notices, the notices are required under the FCRA.

The Dodd-Frank financial reform law gives the right to receive a free credit score to anyone who has received credit at a rate higher than other consumers or whose credit rate is adjusted unfavorably because of a credit score. This means, for example, if your credit card company reviews your credit score and decides you represent a heightened credit risk because your score has dropped, the company can increase your interest rate. If this happens, you are entitled to a free credit score.

The Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) have issued joint final rules that explain consumers’ rights to a free credit score when a score, rather than a credit report, is used to set or adjust credit terms.

Under this rule, free credit scores are available to consumers along with an explanation of the factors that adversely affected the score, the date the score was created, and the name of the consumer reporting agency that provided the score to the creditor. So-called “proprietary” scores such as those used to set insurance or mortgage rates are generally not included in this risk-based pricing rule. An exception exists, however, for a “proprietary” score that is derived solely from information included in the credit history report.

The FCRA does, however, give everyone the right to a free credit report from each of the three national credit bureaus. Free reports can be obtained once every 12 months. Since information included in your credit report is the basis for all scoring models, errors in the report can translate to a lowered credit score. For more on free credit reports, see http://www.consumer.ftc.gov/articles/0155-free-credit-reports.

Does the FCRA give me the right to get my FICO score?

No. The FCRA only covers two kinds of scores. The "educational" score shows you how scoring works and how you rate as a credit risk. You may also get a "mortgage score," that is a score used in connection with residential real property loans. You are entitled to the mortgage score free if your loan is denied.

Can I get my credit score without also buying a credit report?

This depends mainly on where you live and where you get your score. Laws in California and Colorado allow you to get your credit score for a "reasonable" fee. Educational scores produced by the credit bureaus may also be purchased as a stand-alone product without also buying a credit report.

Are stand-alone scores of any value to me?

Stand-alone "educational" scores can give you an indication of your credit risk level. Also, a score that is completely out of line with your knowledge of your own financial status may indicate something amiss in the underlying credit report. But keep in mind, scores are in a sense a "moving target," depending on the information in the credit report at the time your file is scored.

Will I know how the credit bureau arrived at this score?

When you request your "educational" credit score, it should come with a notice that tells you:

That the credit scoring model may be different than the credit score that may be used by lenders.

The range of possible scores under the model used.

The key factors (limited to four) that adversely affected the credit score.

The date the credit score was created.

Can I dispute a low credit score?

No. The dispute process outlined in the FCRA applies to your credit report, not your credit score. Since your score is based on data in your credit report at any given time, correcting errors in your credit report should improve your score. (For information on how to dispute data in your credit report, see www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm)

You may receive so-called "reason codes" from a lender if your credit score is low and you are rejected for a loan. The website ReasonCode.org can help you understand the meaning of these reason codes.

3. Who's Keeping Score?

Fair Isaac, Inc., www.myfico.com, was the first company to develop a credit scoring model based on selected criteria included in credit reports. In the 1990s the mortgage industry started to use scoring models to automatically rate consumers. In these early years credit scoring was largely a mystery to consumers.

Today credit scoring has moved far beyond the mortgage industry and is used by nearly all lenders to make instant decisions about the odds a loan will be repaid. Scoring models developed by Fair Isaac, which have come to be known simply as your FICO, continue to dominate the credit scoring market.

Fair Isaac licensed its scoring software to all three national credit bureaus. Then each bureau adopted its own version of the Fair Isaac model. Different scoring factors coupled with different data in each bureau's credit files can lead to wide disparity in scores. You may have seen this first hand when you applied for a car loan or other credit.

In March 2006 the three national credit bureaus announced a joint venture and a new credit scoring system -- VantageScore. With the new scoring system, the bureaus apply a uniform scoring model.

In addition to FICO scores and the VantageScores, many other companies have developed scoring models. Experian, for example, estimates there may be up to 1,000 different scoring models, each with a different scoring range. Some models focus on specific types of loans like automobile loans or credit cards. Very often credit scores come bundled with offers to sell other products such as credit reports, credit report monitoring services or identity theft insurance. We discuss such offers in Part 7.

It has become the industry norm, although not required by federal law, to allow consumers to purchase credit scores or get free scores when applying for a mortgage. Scores may also now be available through companies with which you have an existing relationship.

Are my “scores” always based on information in my credit report?

For years creditors and insurance companies and others have looked to scores based on credit report data to assess risk and target marketing campaigns to consumers most likely to purchase a product or service. The data that goes into credit-report scores is fairly transparent, that is consumers have some sense of the data that resulted in the score.

More recently, new types of predictive consumer scores use thousands of
pieces of data about consumers to predict how they will
behave in the future. These scores are based on non-traditional data not usually
found in credit reports. Consumers have no right to see these scores or even
to know that they exist. These scores are largely unregulated by the FCRA. For more information on predictive scoring, see the World Privacy Forum's report The Scoring of America: How Secret Consumer Scores Threaten Your Privacy and Your Future (April 2014).

4. The Tally - When Points Are Added or Taken Away

In Part 3 we discuss the joint scoring model called VantageScore adopted by the three national credit bureaus. VantageScores range from 300 to 850. The factors that go into the VantageScore are explained at http://your.vantagescore.com/

FICO scores range from 300 to 850. The higher your score, the more likely you are to be seen by creditors as a good risk. This quick risk analysis translates into dollars in your pocket. The difference in interest rates and finance charges can be dramatic. Learn more about FICO scores at http://www.myfico.com/CreditEducation/articles/.

What factors determine my FICO credit score?

The exact formula of the FICO and other scoring models such as the VantageScore is a trade secret. However, Fair Isaac has identified five factors and the importance given to each factor. VantageScore and other scoring models include most of the same factors. However, the weight given to individual factors may vary.

Over five years ago I had several late payments due to an illness. Will this affect my score?

Yes, but not as much as a recent late payment. Negative information can remain on your credit report for seven years, and this information will be calculated into your score as long as it appears on your credit report.

However, the more recent the late payment, the more it will detract from your score. In addition, the longer a debt goes unpaid and the more accounts that show a history of late payments, the more points will be subtracted from your total score. For example, if your credit report shows several accounts that were 120 days past due, this is far more damaging to your score than one account that was 30 days past due.

Does the calculation include only negative information?

No. The number of accounts shown on your credit reported as "never late" or "paid as agreed" have a positive effect on your credit score. It just seems like the calculation is based only on negative factors.

Often negative information is reported without a corresponding report of positive information. Utility companies are a good example of this. You are not likely to get positive points for paying your electric bill on time, but the utility company late payments will negatively impact your score. Parking tickets or even library fees may show up on your credit report. But, you won't get extra points for being a good driver or responsible library patron.

Does my credit card company have to report on-time payments to the bureaus?

There is nothing in the FCRA that requires any company to report either positive or negative information. If a company you do business with does not report to at least one of the three national credit bureaus, contact the company and ask that your good record be included in your credit report. If companies you do business with refuse to report to one or more of the credit bureaus, take your business elsewhere. And let them know why you are moving on. Companies that lose customers because of their irresponsible business practices need to hear from you.

Does my credit card company have to report my credit limit to the bureaus?

Some companies that report on-time or late payments may not, in the past, have reported the maximum credit available. The ratio of credit used to credit available factors into your score. Without the maximum credit limit, scoring models often substituted the high balance used on your credit card. Such a practice creates a misleading impression about your use of credit. For example, your credit limit may be $10,000 and the most you have ever charged is $3,000. Although a 30% ratio of credit used to credit available is acceptable, without the credit limit, scoring models could only calculate $3,000 as your available credit. As a result, your score would identify you as one who maxed out their credit cards, signaling you as a poor risk for many lenders.

Under rules adopted by the Federal Trade Commission (FTC) and federal banking agencies, reports to a credit bureau must also include your credit limit. The rules impose standards of accuracy and integrity on companies that report to credit bureaus. If, when reviewing your credit report, you find that your credit limit has not been reported, contact the creditor and request that this be rectified.

Does it improve my score to pay off my credit card balance every month?

Not necessarily. Points are given or taken away based on the amount of available credit used. Certainly, using the maximum amount on your credit card and paying only the minimum each month can lower your score. But, using a large percentage of your available credit each month, even when you pay the bills faithfully, can detract points if you are carrying a high balance at the time your credit history is scored.

Remember, the credit score is a snapshot of your credit report on any given day. Most credit card companies and other lenders report to the credit bureaus every 30 days. If your credit report is scored right before your monthly credit card bill is due and you've used a significant portion of your available credit, your score will go down.

Why do I have a different score from each credit bureau?

There may be a number of explanations for varying scores. Not all lenders report to all three credit bureaus. A late payment reported by a credit card company to only one bureau would lower your score on that bureau's credit report. Also, until recently, each credit bureau used its own variation of the FICO model. Even slight deviations could end in a different score. As discussed in Part 3 of this guide, with the VantageScore the three national bureaus now use the same scoring model.

How do the types of loans I have affect my credit score?

Major bank credit cards with good payment records are better for your score than a department store card. Loans or credit established with a finance company, even when you have a good payment record, do not carry as much weight as a major bank card. A major bank card says you are in the mainstream of credit where credit limits can reach the stratosphere with a good payment record.

A revolving credit card such as with a department store generally carries a very low credit limit. One who seeks credit from a finance company may be considered in the high-risk category and ineligible for the mainstream credit market. Installment loans such as car loans and mortgages have a positive effect on your credit score although a high loan balance-to-value ratio can detract from your score.

Will credit counseling hurt my score?

According to Fair Isaac, the fact that you participate in credit counseling is not calculated into your FICO score. However, scoring models developed by other companies do not necessarily follow the FICO factors.

In our view, credit counseling should not be a scoring factor. Credit problems that cause you to seek counseling are almost certainly reflected in your credit report. Any scoring system that includes counseling as a negative factor is simply unfair. If anything, counseling should be considered a positive factor.

5. Do Credit Report Inquiries Lower Your Score?

Your credit report includes more than your record of paying bills. One section of the report lists inquiries. These are records showing who has accessed your credit report. There are various purposes allowed for companies to look at your credit report.

Your credit card company may monitor your report to review your account with them. This type of inquiry appears on your credit report, but does not affect your credit score.

You apply for a job and the employer orders your report. This inquiry does not affect your credit score.

You check your own credit report. This will not lower your credit score.

The only credit report inquires that can lower your credit score are applications for new credit.

I'm shopping for a new car and have applied to several lenders. Will these inquiries lower my score?

According to Fair Isaac, multiple inquiries to automobile or mortgage lenders within a short period of time (usually 30 days) generally count as a single inquiry. Thus, a little shopping for the best interest rate should not hurt your credit score. www.myfico.com/CreditEducation/FactsFallacies.aspx?fire=5

However, when shopping for a big-ticket item or going on a shopping spree in a department store, it is probably wise to pass up the 10% discount offered by many retailers for opening a new store account.

Will closing old credit accounts increase my score?

No. In fact the opposite may be true. Scoring models look at both your current use of credit and the length of time you have used credit. Older accounts even with a zero balance establish your history as a credit user.

Do I need a perfect score of 850 to get the best interest rate?

No. Fair Isaac estimates a score ranging between 720 and 850 qualifies for the best interest rate. If you have a score within this range, but are being quoted sub-prime rates, it may be time to shop for another lender. At least, you should try to negotiate a better rate based on your good score.

6. You Have to Play to Score

For various reasons, some people shun credit, choosing instead to live on a cash-only basis. Perhaps self-discipline, a bad experience with credit, or even family tradition have steered you away from credit cards or installment loans. Others, especially recent graduates just starting out, have not had a chance to establish a credit history.

A traditional credit score calculation is nearly impossible without a credit file. Having just a few notations in the file can result in a "thin" file, equally impossible to conform to the standard scoring models.

I pay my bills on time, but in cash. Can I ever hope to get credit?

Fair Isaac has developed a scoring model designed to score credit risk through "non-traditional" data obtained from various data vendors. This, the company claims, will make credit easier for the nearly 25% of the population that either has no credit file or too little information to benefit from traditional scoring models. The kinds of accounts covered in what Fair Isaac calls the FICO Expansion Score include deposits with a bank, records with payday lenders, and purchase payment plans.

One example of data that could either help or hurt you in obtaining a good expansion score is your banking history. ChexSystems is a consumer reporting agency that compiles information and issues reports about banking. If you have a negative entry in your ChexSystems report, it could be detrimental to your score. If this is a concern, you can check your ChexSystems report free once every 12 months. www.consumerdebit.com/consumerinfo/us/en/index.htm

Experian, one of the three national credit bureaus has now introduced a product that allows property managers to submit data regarding a renter’s payment history. Although the product is focused on helping landlords avoid risky tenants, positive data reported should also help tenants who have built a solid record of paying rent on time. For more on Experian’s rental property data file, see: www.experian.com/rentbureau/rental-history.html

Can I elect to have a lender use the FICO expansion score rather than my credit history?

Expansion scores cannot be used as an alternative to scoring your credit report. If negative information in your credit report results in a low score, you cannot avoid this by selecting an expansion score. Again, the expansion score's goal is to allow lenders to make credit offers to consumers who don't have a traditional credit history. Like the traditional scoring models, the expansion score seeks out consumers with a good payment history.

Start small, perhaps with a credit card secured by your bank account. Make payments consistently on time. And, do not use all available credit. In fact, try to keep your use of available credit under one half the limit.

Will my score increase when my credit limits go up?

Not necessarily. Scoring models take into account how you use your available credit. Maxing out your credit cards or using all the available credit will deduct points from your score. The amount of credit you have available is not a scoring factor.

7. Scores for Sale - Proceed with Caution

Despite the shroud of secrecy that once surrounded credit scoring, the market for scoring products is now big business. A simple Internet search using the words "credit score" reaps millions of sites. Many of these sites sell packages of credit products that can include not only credit scores but credit reports, credit monitoring services, and identity theft insurance. Some searches may even lead you to fraudsters whose aim is not to sell you a credit score but rather to steal your personal information.

What is the best way to order my score?

The best way to purchase your score is through one of the national credit bureaus. The national bureaus are:

The credit bureaus also offer a stand-alone score. You may purchase an educational score or the official FICO score through the credit bureaus, Experian, TransUnion and Equifax. You can also purchase your FICO score through www.myfico.com.

How will I know the score I purchase through a credit bureau is my FICO score?

A FICO score purchased through a credit bureau should be clearly indicated as a FICO score.

Whether you purchase a credit score through one of the credit bureaus or through the Fair Isaac, Inc., these websites provide a confusing array of packaged products from multiple reports and scores from all three credit bureaus, as well as credit monitoring services. It can, in short, be difficult to determine exactly how to purchase a stand- alone credit score without committing yourself to a “free” trial or purchase of products for which you have no need.

In purchasing a credit score or any other credit product, you should be guided by what you hope to gain by having this information in hand. If, for example, you are considering an application for credit and want to detect errors in your credit file, purchasing an educational score should be enough to serve your purpose. Although this may not be the same as the score a potential lender would see, it will nonetheless alert you to any discrepancies in your credit file. You will be given an opportunity to purchase a credit score when you order your free credit reports through the official website.

What is the harm in ordering credit reports and scores through an alternative web site?

Web sites you access through a search of such terms as "free credit reports" or "free credit scores," may end up costing you money for products you neither need nor want. In the worst case, sites may actually be a fraud designed to steal your personal information.

Will the credit score that I purchase be the same score that can be seen by lenders?

Not necessarily. A September 2012 report by the Consumer Financial Protection Bureau (CFPB) found that the credit scores can differ. When you purchase your credit score, be aware that a lender
may be using a very different score in making a credit decision. The study found that one out of five consumers would likely receive a meaningfully different score than would a creditor.

8.Tips for Improving Your Score

Monitor your credit report and dispute errors. Errors in your report will usually translate into a low score.

Pay your bills on time even if it means you can only pay the minimum amount due.

Low balances are a positive factor in scoring models. Don't use all your available credit.

New credit applications can detract from your score. Even an application for a department store card can lower your score. Multiple applications can have a devastating effect on your score, especially around the time you are shopping for major purchases like a car loan or mortgage.

Old accounts (even those you haven't used for a long time) can help your score. Scoring models look at not just how to use credit today but also how long you have used credit.

Consolidating balances or moving debt around may make for one easy payment, but this can have an adverse effect on your score. Shuffling of balances could be especially harmful to your score if you close established accounts and open new accounts to consolidate your debt.

Ask your lender what scoring model it uses. With many different scoring models available, it is easy to get confused. A number score alone will not tell you where you stand.

Know the going interest rates. Current rates for mortgages, car loans, and other consumer credit are published in daily newspapers or can be found online at such sites as www.bankrate.com. If you have a good credit score but are not offered a good interest rate, ask questions, negotiate, or shop elsewhere.

A May 2013 joint survey report issued by the Consumer Federation of America and VantageScore Solutions points out some of the inadequacies in consumers’ understanding of how credit scores are calculated and the importance of comparing scores across competing scoring systems.

As part of the survey, CFA and Vantage Score launched a website offering an interactive quiz to help educate consumers about various factors that influence their credit score. To take this quiz, go to: www.creditscorequiz.org/